Agricultural Market Committees Liable for Service Tax on Renting Immovable Property: Supreme Court Judgment (23 February 2022)

Introduction

Date of the Judgment: 23 February 2022

Citation: 2022 INSC 224

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Are Agricultural Produce Market Committees (APMCs) exempt from service tax on the rent they collect from shops and land within their market areas? This was the core question before the Supreme Court. The court was tasked to determine whether the activities of renting out shops and land by APMCs constitute a statutory duty, which would exempt them from service tax before 1 July 2012.

The Supreme Court, in this judgment, addressed the service tax liability of Krishi Upaj Mandi Samitis (Agricultural Produce Market Committees) concerning the renting of immovable properties. The bench, comprising Justices M.R. Shah and B.V. Nagarathna, delivered the judgment, clarifying the tax obligations of these committees.

Case Background

The Krishi Upaj Mandi Samitis (Agricultural Produce Market Committees), established under the Rajasthan Agricultural Produce Markets Act, 1961, regulate the sale of agricultural produce in notified market areas. These committees charge a ‘market fee’ for issuing licenses to traders and rent out land and shops, collecting allotment fees or lease amounts. The Revenue Department contended that the APMCs were liable to pay service tax on the services rendered by them by renting/leasing the lands/shops.

The dispute arose when the Revenue Department issued show cause notices to the APMCs, arguing that they were liable to pay service tax on the rental income from land and shops. While the department agreed that the “market fee” or “mandi shulk” was not taxable, they held that the rental income was taxable under the category of “renting of immovable property.”

The tax demands were confirmed, and penalties were imposed under Sections 76, 77, and 78 of the Finance Act, 1994. The APMCs appealed to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The CESTAT ruled that the APMCs were not liable for service tax after 1 July 2012, due to the introduction of the Negative List Regime, but upheld the tax liability until 30 June 2012.

Timeline:

Course of Proceedings

The jurisdictional authorities initially held that the APMCs were not liable to pay service tax on the “market fee” or “mandi shulk” collected by them. However, they were deemed liable for service tax under the category of “renting of immovable property” for renting out land and shops. Consequently, service tax demands were confirmed, and penalties were imposed under Sections 76, 77, and 78 of the Finance Act, 1994.

The APMCs then appealed to the CESTAT. The CESTAT noted that with the introduction of the Negative List Regime on 01 July 2012, the services in question were excluded from tax liability. The CESTAT held that the APMCs were not liable to service tax on renting of immovable property used for the storage of agricultural produce in the market area after 01 July 2012. However, they were held liable for the period before that date. The CESTAT also set aside the penalties imposed on the APMCs.

The APMCs, dissatisfied with the CESTAT’s decision holding them liable for service tax until 30 June 2012, appealed to the Supreme Court.

Legal Framework

The core of the case revolves around the interpretation of the Rajasthan Agricultural Produce Markets Act, 1961, particularly Section 9, which outlines the duties and powers of the Market Committees. The relevant sections are:

• Section 9(1) of the Rajasthan Agricultural Produce Markets Act, 1961: This section uses the word “shall” indicating mandatory duties of the Market Committee.
• Section 9(2) of the Rajasthan Agricultural Produce Markets Act, 1961: This section uses the word “may” indicating enabling powers of the Market Committee.
• Section 9(2)(xvii) of the Rajasthan Agricultural Produce Markets Act, 1961: This provision empowers the Market Committees to allot or dispose of land or any movable or immovable property for carrying out their duties.
  
  “9(2)(xvii) for the allotment or disposal of land or any movable or immovable property for the purpose of effectively carrying out its duties.”
• Section 9(2)(xiii) of the Rajasthan Agricultural Produce Markets Act, 1961: This provision authorizes the Market Committees to levy, recover, and receive rates, charges, fees, and other sums of money.
• Rule 45 of the Rajasthan Agricultural Produce Markets Rules, 1963: This rule specifies that all money received by the Market Committee shall be credited to the Market Committee Fund.
  
  “45. The Market Committee fund .- All money received by the Market Committee shall be credited to the fund called the Market Committee fund. Except where Government on application by the Market Committee or otherwise shall direct, all money paid into the Market Committee fund shall be credited at least once a week in full into Government treasury or sub-treasury, or a bank duly approved for this purpose by the Director. All balance from the fund shall be kept in such treasury or sub-treasury or bank and it shall not be withdrawn upon except in accordance with these rules.”
• Sections 76, 77 and 78 of the Finance Act, 1994: These sections relate to penalties for non-payment of service tax.

The court also considered the exemption circular No. 89/7/2006 dated 18.12.2006, which exempts public authorities from service tax for activities that are statutory obligations, with fees deposited into the Government Treasury.

Arguments

The appellants, the Krishi Upaj Mandi Samitis, argued that their activities of allotting shops and spaces for storage and marketing of agricultural produce are statutory duties under Section 9 of the Rajasthan Agricultural Produce Markets Act, 1961. They claimed exemption from service tax based on Circular No. 89/7/2006 dated 18.12.2006, which exempts statutory activities of public authorities.

The appellants contended that:

• Under Section 9(2)(xvii) of the Act, 1961, the Market Committees are responsible for the allotment/disposal of land for effectively carrying out their duties.
• Section 9(2)(xiii) authorizes them to levy and receive fees.
• The fees collected are deposited into the Market Committee Fund and used for the betterment of the market area.
• As public authorities performing statutory functions, they are entitled to the exemption under the 2006 circular.

The Revenue Department countered that the allotment/renting/leasing of shops/land is not a mandatory statutory activity. They argued that:

• Section 9 of the Act, 1961, is an enabling provision, and the use of the word “may” in Section 9(2) indicates that it is not a mandatory duty.
• The exemption circular applies only to activities that are mandatory statutory obligations, with fees deposited into the Government Treasury.
• The fees collected by the Market Committees are not deposited into the Government Treasury but go to the Market Committee Fund.
• The exemption notification must be strictly construed, and the Market Committees do not fulfill the conditions for exemption.

The Revenue also argued that the subsequent inclusion of such activities in the Negative List from 01.07.2012 indicates that they were not intended to be exempted under the 2006 circular.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the activity of allotment/renting/leasing of shops/land/platforms by the respective Market Committees constitutes a statutory activity, thereby exempting them from payment of service tax under the 2006 circular for the period up to 30.06.2012.

Treatment of the Issue by the Court

Authorities

Judgment

Key Takeaways

The key takeaways from this judgment are:

• Agricultural Produce Market Committees are liable to pay service tax on the rental income from shops and land for the period up to 30 June 2012.
• The activities of renting out shops and land by APMCs are not considered mandatory statutory duties under the Rajasthan Agricultural Produce Markets Act, 1961.
• Exemption notifications must be strictly construed, and the conditions for exemption must be met precisely.
• Fees collected by public authorities must be deposited into the Government Treasury to qualify for exemption under the 2006 circular.
• The inclusion of such activities in the Negative List from 01.07.2012 indicates that they were not intended to be exempted under the 2006 circular.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the activities of renting out shops and land by Agricultural Produce Market Committees are not mandatory statutory duties, and therefore, they are not exempt from service tax under the 2006 circular. This judgment reinforces the principle that exemption notifications must be strictly construed and that the conditions for exemption must be met precisely. It also clarifies the distinction between mandatory duties and enabling powers of public authorities under the statute. There is no change in the previous position of law.

Conclusion

In conclusion, the Supreme Court dismissed the appeals filed by the Agricultural Produce Market Committees, holding them liable for service tax on the rental income from shops and land for the period up to 30 June 2012. The court clarified that the activities of renting out shops and land were not mandatory statutory duties and did not meet the criteria for exemption under the 2006 circular.